What happened

Shares of Atlassian (TEAM 0.07%) plunged as much as 42.6% this week, according to data from S&P Global Market Intelligence. The company, which sells productivity software to other businesses, posted negative earnings and weak guidance in its latest financial update for investors. As of 1:23 p.m. ET on Friday, shares were down 41.6% for the week. 

So what

On Thursday afternoon, Atlassian updated investors on its financial performance for its fiscal 2023 first quarter, which ended Sept. 30. Revenue grew 31% year over year to $807 million, and the company produced adjusted earnings of $0.36 per share. Both of these numbers were close to Wall Street's consensus estimates, and typically in such cases, stocks don't make crazy moves in the days following earnings reports.

Clearly, that wasn't how it played out with Atlassian. Investors are worried about the company's slowing billings growth, which is a forward-looking revenue indicator for software companies. Billings for the quarter were only $798 million, significantly undershooting the Wall Street consensus estimate of $830 million. Its guidance for the current fiscal quarter was also weak, at $845 million vs. the analysts' estimate of $879 million. Considering these big misses, it is no surprise that Atlassian's stock is down this week.

With the bear market raging, inflation still high, and the Federal Reserve continuing to raise interest rates, investors are getting increasingly pessimistic about software stocks like Atlassian that aren't generating much profit. If these companies don't fully live up to expectations, traders will throw them out of their portfolios and drive their stock prices down in a hurry.

Now what

At this point, Atlassian is down by about 74% for the year. The company has a great track record of growth -- it has grown its revenue by 777% since it went public in 2016. It also has a healthy balance sheet with over $1 billion in cash, and positive operating cash flow. There are no worries about this business going bankrupt, despite its stock price tumbles. 

Trading at a price-to-sales ratio above 10 compared to the market average of 2.2, the stock is still expensively valued. However, if you are a long-term believer in Atlassian's business and think it will eventually pivot to delivering higher profit margins, now could be a great time to scoop up some shares.